[IP] The Apple-Amazon Ebook War Begins: Amazon Deletes Macmillan Books

It's not obvious from the outside, but Amazon.com has been selling books
below its wholesale cost in order to keep the price at US$9.99.
Presumably, it thinks the subsidies are worthwhile in the short run in
order to establish its monopoly, or at least leadership, position.

The current economics work like this (as I found out during discussions
with my print publisher over licensing of a Kindle edition):

My book sells for $21.95 in hardcopy (softcover). Typically, the
wholesale price to Amazon or the other largest distributors is 50% of
cover price, or $10.98. Most print publishers (collusion? what collusion?)
have set the nominal "cover price" of the e-book to be the same as that of
the hardcopy. That goes along with their bogus claim to authors that e-
book rights are part of print rights, and that the e-book is a "book sale"
on which only the royalty percentage of 10-15%, not the rights license
percentage of typically 50%, is due the author -- even when it is
described to the end user as a "license" not a sale.

Print publishers thus set the "wholesale price" of the e-book version as
the same the wholesale price of a hardcopy, or 50% of the cover price.

Under current arrangements, Amazon's wholesale cost is set by the print
publisher, but the retail selling price is up to Amazon. So when someone
buys a copy of the Kindle edition of "The Practical Nomad: How to Travel
Around the World" for $9.99, Amazon is paying my publisher $10.98 (of
which I get either $1.65 if it is considered a book sale, or $5.49 if it
is considered a license of subsidiary rights). Amazon is subsidizing the
transaction by $0.99, plus its transaction costs.

To recap, of that $9.99:

Amazon loses $0.99 (loss-leader subsidy)
Print publisher retains $9.33 after royalty payment to author
Author gets $1.65 (royalty)

Macmillan is proposing that rather than "sell" e-books to Amazon for "re-
sale" (again, a hypocritical position in light of the end-user license
terms, but all-important to the author/print publisher revenue split under
most current contracts), Macmillan would appoint Amazon as its "agent" for
the "sale" of e-books by Macmillan, so that Macmillan would control the
pricing, with a 70% Macmillan / 30% Amazon revenue split. What percentage
of Macmillan's 70% would go to the author remains unclear, although I
presume there will be the same dispute over whether the book sale or the
subsidiary rights license clause of the author-publisher contract governs.

Under this model, if the Kindle edition were to sell for $15, Amazon would
get $4.50 and the print publisher $10.50 (with the same issues of how much
of that $10.50 would actually be passed on to the author). In other words,
Macmillan is proposing a scheme under which print publishers would get
less on each sale, even at higher retail prices, and Amazon *much* more,
in exchange for print publishers (1) getting control over retail e-book
pricing, and (2) preventing Amazon from continuing to subsidize the
development of a dominant or monopoly role as e-book retailer.

Macmillan's position is made more clear here:

http://www.publishersmarketplace.com/lunch/free/

Of course, once answer for how to maintain lower prices is for authors to
license e-book distribution directly, without involving the print
publisher at all. That's the *real* threat to print publishers. Whether
it involves an author licensing a Kindle edition or selling DRM-free PDF's
form the author's web site, cutting out the lion's share of current e-book
revenue currently going to print publishers gives the potential for lower
prices for e-book readers *and* higher revenues for writers.

There's much more analysis in today's special edition of the free, but
subscription-only, Publishers Lunch e-mail newsletter. I don't know if
you can get today's edition if you subscribe today, but you might:

http://www.publishersmarketplace.com/lunch/subscribe.html

----------------
Edward Hasbrouck
<edward@hasbrouck.org>
<http://hasbrouck.org>
+1-415-824-0214

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